Introduction
Tax issues always depend on various external factors affecting the level of politics and economics. The strongest of these is the pandemic, which has required an immediate response from governments around the world. The pandemic has made adjustments to the global economy, consumer behavior styles, and company opportunities and planning. Many were unprepared to face so many emerging risks. Interaction at the company’s level and the consumer now has entirely different patterns that will not return to their original state. Many states suffered significant damage, as well as private firms. As a result, after all the costs of the pandemic, governments are forced to adjust tax policies, and companies in a state of profound crisis are forced to respond to all changes in the law. The activities of businesses that go beyond the borders of America are even more strongly affected by such tax changes. In essence, companies involved in international cooperation must monitor the situation from two sides: how the laws work within their country and the countries of their clients.
In addition, the government is conducting its activities in parallel with the pandemic. For example, attempts to regulate the digital economy also require, to a certain extent, different reactions from companies regarding multinational collaborations in America. The ever-increasing profits of multinational companies are causing concern among more modest players in the market since things are moving towards a monopoly (Clausing 2020). The government responds accordingly, using taxes in the digital economy and multinational companies as a leverage solution. However, such changes may affect not only the most prominent representatives of the market but also all companies that have cooperated in the international arena. This paper examines tax issues related to multinational partnerships in America provides an analysis of the facts and applicable tax laws, tax rules, or orders of the IRS and how they affect the activities of such companies.
Budget Response
Governments that have found themselves in a difficult economic situation due to the pandemic have been forced to seek funds to cover the costs caused by the spread of the virus. Multinational companies must take into account all these changes in political factors. Although some entrepreneurs could qualify for financial assistance under certain conditions in America, some industries have almost completely lost the opportunity to earn money (Song, Yeon and Lee 2021). Due to the fact that taxes are one of the main tools for replenishing the state treasury, their regulation was an acute issue after assessing the damage of the pandemic. The closure of the borders of many countries complicated trade relations, import and export of various goods raw materials for production.
Against the background of these changes, there were qualitative changes at the social level. Consumers have changed their behavior, switching to online shopping, delivery services instead of physical visits to offline stores, payment through e-commerce instead of cash (Hashem 2020). In a digitalized world that was only partly taxed before, the government has made efforts to create a fair and new taxation system. However, this fact is only a tiny part of the consequences of changes in the tax system that will affect transnational organizations. The US tax system is designed so that taxes on non-US income are dependent on whether that income is connected to the United States and on the level and extent of non-US citizens’ presence in the States.
First of all, in January 2021, significant changes to the United States tax laws were proposed. The President has proposed higher corporate and personal tax rates, enacted by the Tax Reform Act of 2017 (U.S. Congress. 2017). In his opinion, corporate taxation in the US should undergo the following fundamental changes: increasing the corporate tax rate to 28% and tightening US international tax rules. Until 2022, PL 115-97 allows a total write-down of most new investments, after which this benefit is phased out until 2026. PL 115-97 limits net interest expense deductions to 30% of adjusted taxable income (U.S. Congress. 2017). PL 115-97 also introduced fundamental changes to the US taxation of multinational corporations and their foreign-sourced income. Prior to the passage of the Act, dividends distributed by foreign subsidiaries to their US parent companies were taxed in the States based on foreign income taxes paid, in other words, under the so-called worldwide system (U.S. Congress. 2017). Now 10% profit on certain investments in qualified business assets is exempt from further taxation in this jurisdiction, i.e., the transition to the territorial system.
In this case, this fact is a definite plus in favor of multinational companies, whose income taxation considers global income. However, there has been talking of a corporate tax increase since last year, and such laws could likely be passed in order to replenish the resources spent on fighting the virus. Possible areas where taxation may come in the upcoming bills, digital services, online sales, and technological developments of blockchain commerce, cryptocurrencies, and the like are highlighted (Khadzhiev, 2019). Digitalization can play an essential role in developing the tax authorities’ control systems themselves. On the other hand, the government always fully covers the cost of business investment in equipment. Green innovations and technologies can also provide incentives to invest in these infrastructures, especially those related to carbon reduction and human health.
Corporate tax cuts are thought to help increase domestic investment. Tax cuts allow for higher dividend returns, but this is not always the case for multinational companies. The actual statutory tax is always less due to various deductions and allowances available. Firstly, international companies can generally be tax-free, as in the case of the production of intellectual property, which can be produced in any country (Jenniges et al. 2019). Secondly, the practice of shifting profits and eroding the tax base of companies, especially concerning intellectual property, significantly reduces the company’s nominal income in the United States, shifting its main share offshore, where the tax rate is much lower. Thirdly, inversions are possible when a company changes its official location, which may also apply to an American company that becomes foreign. The current policy aims to reduce the possibility of such inversions, as well as the general work of countries to reduce competition in tax matters for transnational countries.
The taxable income of foreign companies is calculated based on effectively related ECI income from trade and business or the sale of real estate in the States by a foreign entity. The ECI tax exemption can be applied through a tax treaty. Foreign companies pay 30% branch income tax on ECI that is not invested in trade and business in the US, and 30% withholding tax on income from non-ECI sources in the States: for example, dividends rents. Other arrangements may be in tax treaties.
The largest multinational companies must pay taxes to the governments of the countries where they operate, depending on sales in each of these countries. The current situation shows that this law, which is under consideration in the United States, implies an increase in payments, but at the same time, the law assumes a decrease in payments in the country where the headquarters is located (Congressional Research Service 2021). As a result, the US government has made a lot of concessions, given how many of the largest multinational companies are headquartered in the US for the international good of creating a standard tax system. At the same time, this initiative is being discussed along with an increase to a flat rate of corporate income tax, which balances, if not worsens, the financial situation for large multinational firms. With a new tax model, the United States wants to intensify negotiations on a more stable international tax system to stop the spread of national fees and prevent tax evasion and the transfer of profits to other jurisdictions by multinational corporations. However, too aggressive policies can backfire and force companies to look for more profitable options outside the United States, which could distance one from compromise with the government and question the need for higher taxes.
Corporate tax at the regional level is highly dependent on the state where the company will be registered. Some states have high tax rates, and the law requires tax payment on gross profits; some do not have both taxes (Ting and Gray 2019). In addition, individual taxes are levied in addition to corporate taxes. For individuals, the maximum income tax rate for 2022 is 37%, excluding long-term capital gains and qualifying dividends. PL 115-97 reduced both individual tax rates and the number of tax brackets.
OECD Influence
There is a term BEPS – base erosion and profit shifting, which refers to the activity of some taxpayers to avoid taxes by transferring income and profits to jurisdictions with reduced taxation. The Organization for Economic Cooperation and Development, which includes the United States, is fighting this phenomenon. The United States, as part of a discussion of tax architecture at the OECD, has proposed a global corporate income tax of 15%, with the option to raise the rate at a later date (Wilkie 2021). The United States needs a flat rate because of a plan to raise taxes on businesses that threaten outflow capital.
Unscrupulous businesses can use various loopholes in the imperfection of various tax laws between countries to reduce the domestic tax base. Developing countries, more dependent on the income tax of large multinational corporations, begin to suffer from this erosion much more than developed countries. Consequently, the OECD has developed a program to standardize tax rules to avoid such precedents. This issue is not limited to the operations of countries: moreover, it is complicated by the digitalization of the economy, as it raises the question of where the economic activities that create value occur.
If the digital economy receives methods of an international approach, implying the creation of jurisdictions where economic operations take place, a more even distribution of the profits of transnational companies across states will be achieved. The main target of the OECD is large multinational enterprises, whose activities will now be taxed in certain situations. Such situations include, for example, automated digital services or consumer-facing businesses (Lips, Mosquera Valderrama and Brokelind 2020). The approach to mirror taxation in different states for international companies can remove all sorts of loopholes for avoiding taxes. For example, limiting the possibility of applying schemes when interest on borrowed obligations is recognized as an income tax expense for a taxpayer in one state and the same interest is not taxed on income from a recipient in another state. Similar events are planned to be held on tax deferrals, tax deductions, withdrawal to low-tax jurisdictions.
Finally, an important issue that concerns the work of the OECD is the regulation of transfer pricing, so that pricing is even more in line with the creation of added value. In other words, companies can now deliberately move the tax base to low-tax jurisdictions, which is very difficult to track in the case of intangible assets and the sale of a company. Here, the OECD will require international companies to be more transparent in their transactions to avoid being manipulated by deliberate tax evasion. As a result, in general, bona fide multinational companies will have to change the procedures for processing various transactions, and in America, they risk facing an increase in global corporate income tax up to 15%. While the OECD’s work aims to eliminate illegal activity, it requires increased controls, the impact of which can negatively affect honest international companies.
Indirect Taxes
Returning to the topic of the pandemic, it should be noted that many governments took out loans to fight the virus. The economy’s gradual recovery may also turn attention to indirect taxes such as VAT, customs duties, sales taxes, excises, taxes on goods and services. Temporarily reduced rates during the pandemic may return to their previous level and even exceed it to increase revenues. On the other hand, given the impact of inflation, the vector of the authorities’ activities will maximize revenue in transaction taxes (IRS 2021). The U.S. corporate tax trend was interrupted by discussions earlier in the year that the country needed a steady and reliable source of income (Bunn 2021). On the one hand, theoretically, such activities are aimed at the largest corporations, which will pay more both in America and in developing countries. In practice, there is a possibility of moving U.S. firms offshore, which is precisely what the OECD is fighting against.
In the United States, VAT is the most common consumption tax. Sales tax applies to the retail sale of tangible personal property and certain digital products and services listed. Although the form of the tax may vary, it is usually levied directly on the proceeds from the retail sale of the object of taxation. Considering the need to pay real estate tax, which is almost the largest globally, customs duties and import tariffs, excises and stamp duties, companies in certain states are subject to a relatively high tax rate. In the OECD trends, in addition to raising corporate taxes, it is possible to tighten penalties for evasion at the international level for each of the listed items of expenditure. Against this background, in addition to harsher penalties, indirect tax rates may increase, which again may negatively affect the financial performance of net income for many multinational companies.
International Remote Work
The restrictions caused by the pandemic have changed consumer behavior, and the way employees work in companies. Increasingly, first forcedly, then out of inertia, the remote work model began to be used. It offers many advantages: the employee works in a comfortable environment, and the company has the opportunity to look for talents around the world, and not just within its region. For transnational organizations, this approach is more accessible, given their experience in the world. On the other hand, the company faces the need to pay income tax and settle work permit and social security issues both within the employee’s country and within his own country. Under certain circumstances, the employee may be the reason for establishing a permanent establishment in the country of residence, which entails additional costs and the need to regulate the company’s legal obligations at different levels.
Accordingly, the possible advantages in the form of more talented employees or the ability to hire cheaper labor may be leveled by the country’s tax policy in which the employee lives. International policy, in this case, may include forms of an agreement on the avoidance of double taxation, regulation of social payments, subsidies, and other things, but not all companies have the opportunity to use it (Tyutyuryukov and Guseva 2021). However, in fact, it is impossible to say exactly how profitable and effective this practice will be in terms of growth for companies; it all depends on each case. Another aspect that requires regulation in matters of tax competition between countries contributes to the constant movement of income in multinational companies.
Conclusion
Taxation in the US for multinational companies is constantly undergoing various changes, most often due to the problems of lost profits that these companies bring to the government. Erosion of the tax base is a world-class problem, and the coalitions created are also called upon to combat it comprehensively. Solution methods are directed against unscrupulous companies that use loopholes to receive deductions benefits from both sides of the interaction. However, these methods include harsher penalties and higher tax rates, impact on indirect taxes, and international employment taxes. As a rule, these rates rise, negatively affecting international companies that operate legally and regularly in the world. However, some current tax changes, such as the elimination of taxes on dividends in PL 115-97, have a positive effect on the financial performance of such companies.
At the same time, a host of trends are taking place, primarily related to the changes in the world caused by the pandemic. These trends include a change in consumer behavior, a crisis for the global economy, an emphasis on the possibility of remote work. To one degree or another, each of them affects the politics and economy of the United States in the area that regulates the activities of the authorities in relation to companies with the help of taxes. As a result, control over issues of remote employment, digital money transactions, online purchases, and much more is being strengthened, which still does not have a well-thought-out legislative base. Shortly, as the economy recovers from the pandemic, it will be possible to observe a very dynamic picture in terms of the taxation of multinational enterprises. In parallel with the trends mentioned above, the activities of the OECD will constantly seek a compromise with the international market, which can respond to too harsh measures with a more aggressive offshore move, which will delay the construction of the most optimal taxation system for such companies.
References
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